Governor signs bill limiting costly school construction debt

Oct. 2, 2013

Updated Oct. 7, 2013 12:32 p.m.

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Placentia-Yorba Linda Unified School District borrowed $22 million in 2011 that will cost taxpayers nearly 13 times that amount – $280 million – to repay. The capital appreciation bonds paid for construction of the Performing Arts Center at El Dorado High School, among other projects. JEBB HARRIS, ORANGE COUNTY REGISTER

Placentia-Yorba Linda Unified School District borrowed $22 million in 2011 that will cost taxpayers nearly 13 times that amount – $280 million – to repay. The capital appreciation bonds paid for construction of the Performing Arts Center at El Dorado High School, among other projects. JEBB HARRIS, ORANGE COUNTY REGISTER

Public schools will no longer be able to shift debt payments for new classrooms to taxpayers 40 years in the future under a bill signed by Gov. Jerry Brown Wednesday.

The bill sharply limits the cost of so-called capital appreciation bonds, which dozens of California schools have used in recent years to escape state limits on school debt and property taxes.

The legislation was proposed after a series of media reports revealed that some California schools had issued bonds that will cost future taxpayers as much as 20 times the amount borrowed. The Register detailed in February how a Kansas City-based bank had encouraged dozens of schools to issue these bonds, including some of the most expensive debt in the nation.

The bonds are costly because they are like a loan on which no principal or interest payments are made for decades. Interest is charged on the unpaid interest, causing the balance to balloon.

Schools will still be able to issue the controversial bonds, but they must be paid off in 25 years.

The bill also limits the cost of the bonds to four times the amount borrowed. That is a sharp reduction from the cost of some bonds that have recently been issued by schools in Orange County.

Placentia-Yorba Linda Unified borrowed $22 million in 2011 that will cost taxpayers nearly 13 times that amount – $280 million – to repay. A $34 million bond issued by Santa Ana Unified will cost taxpayers about $340 million to pay back.

Public schools and community college districts lobbied hard against the bill even though it allows them to continue issuing debt that is more expensive than typical borrowings. Compare the bill’s limits to a 30-year home mortgage at a 5 percent interest rate, which requires payments of about twice the amount borrowed.

State Treasurer Bill Lockyer, who had pushed for the bill’s passage, called the reform “reasonable and balanced.” He said the bill would not hurt schools’ ability to build new classrooms, but would correct “a fundamental unfairness.”

“It ensures school districts no longer can heap outrageous debt burdens on the backs of future generations of taxpayers,” he said in a statement, “force them to pay for aging facilities their children won’t fully enjoy, and at the same time, reduce those taxpayers’ ability to finance the schools their kids need. “

The bill requires schools to provide the public with more information about their planned borrowings. Before the bonds are sold, the schools must disclose how much the debt will cost and provide an explanation of why the district needs to delay interest and principal payments.

In the past, many school boards had approved bonds for which the only publicly released documents included debt repayment schedules filled with blanks.

The schools must also include a provision in each capital appreciation bond that allows the debt to paid or refinanced after 10 years. Many recent bonds are not callable, which means taxpayers cannot pay them off early to limit the expense.

Legislators repeatedly weakened the bill to respond to the schools’ complaints. School officials had argued that the public had overreacted to reports of the costly bond deals. They said the bill would hurt their ability to build and maintain safe classrooms.

The bankers and lawyers who earn fees on such bond deals had blasted the legislation in meetings with school officials. In public hearings in Sacramento, however, the executives mostly stayed behind-the-scenes, letting school officials lead the debate.

Gregory Franklin, the superintendent of Tustin Unified, was one of the officials who had lobbied against some of the limits in the bill. In a letter he sent to legislators this year, he wrote that capital appreciation bonds – or CABS – were “an effective tool” that helped districts issue bonds that voters had approved.

“I do not believe that the decisions made by school districts regarding CABs – even those that are controversial – are rooted in anything but a sincere desire on the part of governing board members, administrators and school business officials to find solutions to pressing facilities needs,” Franklin wrote.

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